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Home » Finance Homework Help » Financing and Leverage
Financing and Leverage
The objective of this particular section of finance is to explain the concept of financial leverage and discuss the alternative measures of financial leverage. Through it one can understand the risk and return implications of financial leverage and analyze the combined effect of financial and operating leverage. It highlights the difference between operating risk and financial risk.

The financial leverage employed by a company is interceded to rain more return on the fixed-charade funds than their costs the surplus (or deficit) wall increase (or decrease) the return on the owners’ equity the rate of return on the cones equity is levered above or below the rate of return on total assets.

Through leverage a company can finance its investments by debt and equity. The company may also use preference capital. The rate of interest on debt is fixed irrespective of the company’s rate return on assets. The company has a legal binding to pay interest on debt. The rate preference dividend is also fixed; but preference dividends are pain when the company earns ore fits. The ordinary shareholders are entitled to the residual income. That is earnings after interest and taxes (less preference dividends) belong to them. The rate of the equity dividend is not fixed and depends on the dividend policy of a company.

The use of the fixed- charges sources of funds, such as debt and preference capital along with the owners’ equity in the capital structure, is described as financial leverage or gearing of trading on equity. The use of the term trading in equity is derives from the cast that it is the owner’s equity that is used as a basis to raise debt; that is the equity that is traded upon. The supplier of debt has limited participation in the company’s profits and therefore, he will insist on protection in earnings and protection in values represented by ownership equity.

Some of its important topics are:

1. Balance sheet approach and corporate taxes
2. Financial leverage and capital structure
3. Firm valuation and horizon period
4. Free cash flow and risk free debt
5. Operating risk

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